Tel Aviv Apartment Prices

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Tel Aviv Apartment Prices

As the Shekel weakens, are foreign buyers going to push Tel Aviv apartment prices even higher?

TL;DR

If you have been monitoring Tel Aviv apartment prices, you might remember that prices were quoted in Dollars. Sellers would switch between the currencies, depending on the exchange rate. In 2002 and 2004, the Israeli government introduced amendments to the Consumer Protection Law to reign back this practice. The Law was finally enforced in 2008. Since then, however, the shekels embarked on a relentless trend downward. Many factors are credited for this.

The off-shore gas reserves for one, the capital inflows into the tech sector, the positive current account balance of payments. Indeed, Israel economic growth is essentially export driven. There is a larger demand for Israeli Shekels, to pay for the goods and services sold abroad than the demand for foreign currencies necessary for the payment for goods and services imported into the country. So how much of the rise in property prices can be explained by the relative strength of the local currency?

Tel Aviv Apartment Prices

The New Gold Standard

Property, like gold, are intrinsically associated to safer investments. For foreign investors, the shekel transformation into a safer asset. Notwithstanding, the relative strengthening, it is the increased stability of the currency that attracted investors. The remarkable resilience of the Shekel despite lingering political uncertainty, the looming threats from the neighboring countries and the geopolitical shifts in the region. So our argument is that foreign buyers have continued to contribute to the increase in property prices, despite (or thanks to) the emergence of the Shekel as stable currency. A weakening of the Shekel, however, may persuade those foreign buyers to step in. Our experience on the ground shows that foreign buyers are highly sensitive to currency fluctuations, but most think that the Shekel is not a bad place to be and what better than getting exposure to it through real estate.

Are the forces at play supporting the Shekel and the apartment prices transient?

The last few months have been really trying to all of us active in the capital markets. Inflation, which we all thought was a thing of the past, if you were lucky enough to have lived those high inflation years of the seventies, has come back in a big way. And with it, the promise of a less accommodating monetary policy. So the Shekel, like all the other non-US currencies weakened relative to the greenback. This is not an isolated Shekel event.

The United States Federal Bank has now embarked on a cycle of aggressive interest rate hikes. More than the actual rate hikes, it is market’s perception of the Fed’s seriousness about the tackling inflation that moves the needle. The latest job reports which are very good, and surprisingly so, support the idea that the Fed has more wiggle room to increase the interest rates without too much of a risk of falling into a recession. This definitely points to a further strengthening of the US Dollar. The graph below shows the average Tel Aviv housing index in four different currencies. The shekel denominated index which has over the past the five years trailing the other currencies is catching up.

What it means is that the apartments are starting to look more attractive to foreigners. And, as a side note, this is a phenomenon we are starting to see on the ground.

Tel Aviv Apartment Prices